Paul Volcker and the move Toward a New Bretton Woods

Posted May 30, 2014 by Martin Armstrong

Paul Volcker spoke at the annual meeting of the Bretton Woods Committee in Washington on May 21st, 2014 (yes once a committee is forms it lives forever). His remarks offer a guide that behind the curtain there are some who see the problems we face in the monetary system, albeit not yet that from a major perspective. There is still hope that balancing budgets will somehow lead to stability and returning to a fixed peg system among world currencies, although no backing of gold.

What is critical in his lecture is the fact that the need for monetary reform exists and the who will manage that need I believe he tends to lean toward the IMF, which I would say is a mistake. Those who think the United Nations would step in I do not see as realistic for there is way too much political distrust of that many nations being involved. Volcker is still willing to see either regional currencies or even a single currency for the reserve. Nevertheless, he speaks the truth insofar as the Euro experiment has been a total disaster. He saw that the free flow of capital among the member states could not offset the lack of a central banking/bond system and the lack of the ability to control fiscal spending of each member. This goes to the heart of the problem with Europe. A unified bond market would have created a stable currency that could have rivaled the dollar but that failure left the euro a highly dangerous currency that could collapse once confidence realized there was no unifying force.

REMARKS BY PAUL A. VOLCKER AT THE ANNUAL MEETING OF THE BRETTON WOODS COMMITTEE WASHINGTON, DC – MAY 21, 2014

A NEW BRETTON WOODS???

“The current travails of the Eurozone (the equivalent of an absolute fixed exchange rate regime) carry interesting lessons. A single currency with the free flows of funds among the member states simply could not substitute for the absence of a unified banking system and incentives for disciplined and complementary national economic policies.

That is all a long introduction to a plea – a plea for attention to the need for developing an international monetary and financial system worthy of our time. …

What is the approach (or presumably combination of approaches) that can better reconcile reasonably free and open markets with independent national policies, maintaining in the process the stability in markets and economies that is in the common interest? …

The creation of the G-20 at the exalted level of Presidents and Prime Ministers has been a political accomplishment. The agreed changes in IMF governing structure are important in achieving a sense of political legitimacy for its governing structure and decision-making. But that is not enough – it means little without substantive agreement on the need for monetary reform and practical approaches toward that end.

We are a long way from that. But what can be done now is to lay the intellectual ground work for approaches that can, for instance, identify and limit prolonged and ultimately unsustainable imbalances in national payments. We should be able, within a broad range, to manage exchange rates among major 6 currencies in a manner that discourages the extreme changes that are inconsistent with orderly adjustment. We can and should consider ways and means of encouraging – even insisting upon – needed balance of payments equilibrium.

Nor would I reject some re-assessment of the use of a single national currency as the dominant international reserve and trading vehicle. For instance, do we want to encourage or discourage so important a development as regional trade and currency areas?

A new Bretton Woods conference? We are long ways from that. But surely events have raised, whether we want to admit it or not, some fundamental questions that have been ignored for decades. …

All that has happened reinforces what we typically affirm: a strong, innovative and stable financial system is fundamental to open trade and to the prosperity of all nations. Participation in such a beneficial system that has become truly international implies certain responsibilities. …

Can we not, in approaching that challenge, restore something of the spirit and conviction that characterized the planning, the negotiation and the management of the Bretton Woods System that I once knew 50 years ago? Our host today, the Bretton Woods Committee lights the candle, but we have a long way to go.